Asset Allocation By Age and Net Worth: How Does It Work?

Asset allocation is an essential part of investment management. In fact, it is THE essential part – more important than any other factor. Any investor who wants to optimize their growth, and ensure a life of what we call financial serenity, needs to use a smart asset allocation strategy, or work with a financial planner who has a proven process for producing successful outcomes.

Asset allocation can help secure your assets against potentially high losses and protect your legacy. It’s particularly essential for individuals who want to invest liquid assets valued at $5 million to $500 million.

Understanding the differences in asset allocation by age and net worth can make a difference to your risk and returns. If that’s something you are interested in, we recommend requesting a free copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.

You can also talk about asset allocation with one of the wealth managers at Pillar Wealth Management. We are a fiduciary advisory firm that offers wealth management services to clients having over $5 million in liquid assets. Click here to talk to a member of our team today!

Before we go any further, and while we did it for the sake of this article, we don’t believe in cookie-cutter asset allocation by age or by net worth. Furthermore, the below is merely a broad range and should not be used in your own planning. Experts must be consulted before arriving at the right asset allocation for you. Someone with $300 million who is 33 years old doesn’t need the same asset allocation as another person who is also 33 years of age but only has $200,000. Please consult with a professional before proceeding with investing or deciding your asset allocation.

In this blog, we will review how asset allocation by age and net worth works. We will also answer questions like:

• How much of your net worth should be in cash?

• What percentage of cash should be in my portfolio?

• What is the best investment for a retired person?

What Is Asset Allocation?

Asset allocation is a type of investment strategy designed to balance your risk and return. It allocates your portfolio into different portions based on your:

• Individual investment goals

• Risk tolerance

• Investment horizon

There are 3 primary asset classes that are considered here. These are stocks or equities, fixed-income securities, and cash and cash equivalents.

All 3 asset classes pose a different level of risk and offer varying returns. Generally, equities are the most volatile assets and have a high risk-reward ratio. In comparison, fixed-income securities and cash and cash equivalents offer lower risk but also generate low returns.

These assets also move in different directions. They behave differently over time and in different market conditions. So, for example, if certain events hurt the bond market (bonds are fixed-income securities), then they may not have the same impact on your equities and cash-based investments. Understanding this can enable you to secure two portions of your portfolio against losses.

Of course, this also depends on what percentage of your portfolio carries bonds. For example, if 40% of your portfolio is bonds, then your returns are likely to suffer a little more. In comparison, if the percentage of bonds in your portfolio is between 25% to 30% then your risk and return will be considerably reduced.

The same applies to stocks and cash equivalents. If an economic event causes the stock market to crash, then the impact on your portfolio will be equivalent to the percentage of equities in your portfolio.

Given this significance, most financial professionals agree that your asset allocation is an essential part of investment management. This means that while it’s important to focus on individual securities, you need to pay more attention to how your assets get allocated in equities, bonds, and cash. This allocation will play a vital role in determining the results of your investment strategy.

Understanding Asset Allocation by Age and Net Worth

Asset allocation can help secure your assets. Asset classes include real estate, stocks or equities, fixed-income securities, and cash and cash equivalents. Understanding the importance of asset allocation by age and net worth can have a monumental impact on your retirement planning, your growing net worth, and the returns you earn.

Your age and net worth are important factors in determining your asset allocation. For example, if you have over $500,000 to invest and you are around 40 years old, then your asset allocation will be very different from an individual who is 60 years old and has $5 million in investable assets.

If you are new to investing, then regardless of your age, the first thing you need to do is accumulate money equivalent to 6 to 12 months of your living expenses. You can place this money in a savings account, a liquid certificate of deposit. These savings can serve as a starting point for your retirement planning. Now let’s take a look at asset allocation by age and net worth.

Bear in mind that these are just samples and examples of standard asset allocation for people belonging to different age groups. If you plan to begin your investment journey, we recommend talking to a financial advisor. To learn more, talk to Pillar Wealth Management!

Asset Allocation for People in their 20s and 30s

People in their 20s normally have a larger risk appetite. They have a longer investment horizon and can recover from financial setbacks. Given these factors, this age group usually invests 70% to 80% of their assets in stocks. 10% to 20% of their investments can be in bonds, and the remaining percentage can be invested in cash and cash equivalents.

This age group can also take advantage of compound interest. This interest grows over time,so how the investment choices you make right now will allow you to increase the value of your savings over time.

For people in their 30s, the asset allocation can be something like this:

Stocks: 60% to 70%

Bonds: 20% to 30%

Cash and cash equivalents: 10% to 20%

People who start investing in their 30s also have a long investment horizon and can make aggressive investment choices. They can allocate a significant portion of their portfolio to stocks. People of this age group are also young enough to leverage the power of compound interest and increase their savings. They have over 30 to 40 years where they will be actively working. Besides this, they also have a 401(k) and an Individual Retirement Account (IRA).

Adding more cash and bonds to their portfolio can also help these individuals take suitable steps toward securing their portfolio against unexpected losses. These people are only starting to build their net worth, so they may not have a significant amount of money to invest. That’s not important, though. As long as you are getting a head start on your retirement planning, you should be in the clear.

Asset Allocation for People in their 40s

When you’re in your 40s, you must start thinking about your retirement a little more seriously. Naturally, your risk tolerance, your investment horizon, and your investment goals will all change a little at this point. You will be less open to taking a lot of risks and will be more interested in securing your savings. Keeping these factors in mind, most people of this age group can opt for an asset allocation as follows:

Stocks: 50% to 60%

Bonds: 20% to 30%

Cash and cash equivalents: 20% to 30%

Depending on their career choices, people in their 40s are usually on the verge of their peak earning potential. They’re likely to have a higher net worth and can use it to make smart investment choices that allow them to grow the wealth. These investments can also allow them to beat inflation.

It’s important to be careful, though.

For instance, you don’t want to invest in penny stocks and opt for blue-chip stocks instead. Penny stocks are highly volatile and pose a great deal of risk while also offering high returns. You may be able to invest in these stocks when you are in your 20s, but as you grow older, taking on so much risk can be unwise. Blue-chip stocks belong to reputable companies with a long history of profitability and delivering stable returns to their shareholders. These companies can sustain their revenues during periods of recession and make for more secure equity investments.

Go through our guide on improving portfolio performance to learn more about this.

Asset Allocation for People in their 50s and 60s

People in their 50s and 60s are close to retiring and have a much shorter investment horizon and very low risk tolerance. This is usually reflected in their asset allocation, which looks somewhat like this:

Stocks: 40% to 50%

Bonds: 30% to 40%

Cash and cash equivalents: 30% to 20%

These individuals need to remember that they will need the money they are investing in a few years, and it will serve as a source of their retirement income. As a result, they can opt for more stable investments such as bonds and cash and invest less in stocks. In terms of net worth, people of this age group will also have a sizeable nest egg that they can invest in across different asset classes.

If you are aiming to invest $5M+ liquid assets, reach out to us. We help individuals with $5 million to $500 million in liquid assets meet their investment and retirement needs. Book a consultation!

Asset Allocation for People in their 70s and 80s

People in their 70s and 80s are either about to retire or are on the verge of retirement. Their asset allocation focuses less on growing their savings and more on generating income, and they need to plan accordingly. Here’s a sample for what is the best investment for a retired person:

Stocks: 30% to 40%

Bonds: 50% to 40%

Cash and cash equivalents: 20% to 30%

The stocks you hold at this point can be used for earning dividend income. You can focus more on cash and bond investments since these pose minimal risk. Generally, these assets prove the best investment for a retired person since they can serve as a reliable source of income.

How Do Cash Investments Work?

When it comes to investment management, there’s one question that we get asked a lot – how much of your net worth should be in cash and what percentage of cash should be in my portfolio?As evident from the samples presented above, this generally depends on your age group and your net worth.

If you are a high net worth investor with $5 million in $500 million in investable assets, then most financial advisors recommend that you carry 30% of your total net worth in cash-based assets. This can help you prepare for:

• Unforeseen expenses resulting from emergencies

• Major lifestyle decisions (for instance, getting married, having children, sending your kids to college, getting divorced, etc.)

• Better investment opportunities

Remember, there is no one-size-fits-all scenario here. The final answer depends on how much cash you can afford to keep, your individual income, your retirement goals, and other factors. At Pillar Wealth Management, we mainly recommend that you make decisions based on what will help you achieve financial serenity.

To learn about financial serenity, click here to read our guide on the 5 vital shifts for improving portfolio performance.

How Can You Achieve Optimal Asset Allocation?

Your optimal asset allocation depends entirely on your retirement goals, your current net worth, your age, and your risk tolerance. A financial planner can help you understand how these factors influence your asset allocation and prepare a portfolio tailored to your needs. They will also be able to take suitable measures that can safeguard your portfolio against potential losses.

If you want to invest over $5 million, we recommend you request a free copy of our new book and learn about high net worth investments, tax planning, and other topics.

At Pillar Wealth Management, we also adopt a series of best practices that can secure your portfolio and help you manage your returns and losses in an optimal way. To learn more, please order a free hardcover copy of our book, The Art of Protecting Ultra-High-Net-Worth Portfolios and Estates – Strategies for Families, Worth $25 million to $500 million.

Wrapping It Up

We hope this blog familiarized you with key aspects related to asset allocation, how much of your net worth should be in cash, what percentage of cash should be in my portfolio, and what is the best investment for a retired person.

Understanding the importance of asset allocation by age and net worth can have a monumental impact on your retirement planning, your growing net worth, and the returns you earn. If you want to invest between $5 million to $500 million in liquid assets, talk to us. Pillar Wealth Management has over 60 years of combined experience in investment management, portfolio design, risk management, tax planning, estate planning, and other wealth management areas.

We can help you create a custom portfolio that accounts for your age, net worth, risk appetite, investment horizon, and investment goals. We also take on a highly strategic approach toward helping you achieve your investment goals. Book a consultation and speak to a qualified wealth manager! You won’t regret it!